Introduction
Carey Olsen, recently ranked in the FinTech sector by Chambers & Partners across each of its offices in Bermuda, British Virgin Islands (BVI), Cayman Islands and Jersey (with a number of notable performers), continues to be a leader in Fintech and digital /virtual asset sector, advising clients on the most new and innovative crypto and blockchain projects. From this vantage point, we get to see emerging trends and market developments in real time, and with all the recent high-profile failures, it’s perhaps no surprise to see an increase in regulation as the industry continues to mature. Governments and regulators around the world are focused on introducing regulation that protects end users and consumers, while promoting innovation. This applies to the jurisdictions where Carey Olsen operates and in this update we highlight some of the regulatory developments across Bermuda, BVI, Cayman, Guernsey and Jersey.
Bermuda
By 2022, we saw the number of digital asset business licenses issued by the Bermuda Monetary Authority (BMA) increase to 16, with companies now offering digital asset business services across six of the seven licensed business activities. We also saw the first commercial banking license for digital assets issued to Jewel Bank, with an expected launch of operations sometime in 2023.
The BMA has openly welcomed inquiries and discussions about projects related to or involved in decentralized autonomous organizations (DAOs) and as a consequence is now considering applications from companies seeking regulatory approval for licensed services to support a DAO. Both regulators and industry advisors have developed a deeper understanding of how such arrangements are legally formulated and operationally structured, which has enabled a productive dialogue around how Bermuda should approach truly decentralized projects.
British Virgin Islands (BVI)
The BVI recently passed the Virtual Asset Service Providers Act, 2022 (BVI VASP Act), which came into effect on February 1, 2023. See our detailed guide to the BVI VASP Act for more information. It is worth noting that all businesses offering virtual asset services as defined in the BVI VASP Act in or from the BVI will have until July 31, 2023 to apply for registration or to cease operations. Anyone planning to offer virtual asset services after the VASP Act comes into force will need to seek approval from the BVI Commission before doing so.
In addition to the BVI VASP Act, recent changes to the BVI AML Regulations mean that from 1 December 2022 virtual asset service providers (such as exchanges and custodians) currently operating from the BVI may already be subject to strict AML and KYC obligations. Any BVI company currently offering virtual asset services as defined in the AML Regulations must conduct AML and KYC must be aware of all AML/KYC compliance processes for any transaction or series of transactions over $1,000. All BVI companies operating in the crypto space should therefore take steps to ensure that they are either outside of AML regulations or that they are aware of and comply with their AML/KYC obligations.
Cayman Islands
We have seen an increase in applications in the Cayman Virtual Asset (Service Provider) Act (Cayman VASP Act) which were approved with 5 approved in Q1 2022 and 8 approved in Q2, bringing the total number of registered persons under the Cayman VASP Act to 18 .
Readers will be aware that the Cayman VASP Act is being introduced in phases with registration first and licensing after that. The registration phase is in place, but the licensing framework is still to be formally introduced, meaning that those businesses that may be subject to licensing, such as centralized exchanges and custodians for now, only need to apply for registration.
Similarly, the process for making an issue request in connection with a public token sale and the option to apply for a dispensation where it is regulated under another registration/licensing regime (such as the Securities Investment Business Act) shall continue to be implemented.
Guernsey
Guernsey has recently passed The Credit, Lending and Finance (Bailiwick of Guernsey) Law, 2022 (LCF Law). We have prepared extensive briefing notes, the main landing page can be seen here. The LCF Act comes into force on 1 July 2023, but applications for licenses should be submitted as soon as possible. Due to the expected rush for applications, the Guernsey Financial Services Commission (GFSC) cannot guarantee that applications received after 31 March 2023 will be processed in time; business that is currently run without the need for a licence, may therefore become illegal if a license is not or cannot be obtained by 1 July 2023.
The LCF Act covers four main areas: consumer credit and finance, “financial firm activities”, virtual asset service providers and financial platforms.
In relation to virtual asset service providers (VASPs), the LCF Act regulates the following activities (where they are carried out by a Guernsey body anywhere, or any body carrying them out in Guernsey):
- exchange between virtual assets and fiat currencies;
- exchange between one or more forms of virtual assets;
- transfer of virtual assets;
- custody and/or administration of virtual assets or instruments enabling control over virtual assets; and
- participation in and provision of financial services related to an issuer’s offering and/or sale of a virtual asset (including, without limitation and by way of example, an initial coin offering).
Carrying out any of these VASP activities without a license or applicable exemption is a criminal offence.
VASPs must enter the GFSC’s “sound box” for an agreed period of time after licensing to be monitored by the GFSC. After a satisfactory initial license period, the GFSC will decide whether the license should be renewed.
For financial platforms, the LCF Act regulates the operation of a peer-to-peer platform; the operation of a crowdfunding platform; and provision of alternative non-bank credit or financial intermediation (ie brokerage or brokerage services).
Although this is probably primarily the case for digital platforms, this need not be the case.
Jersey
On 1 February 2023, Jersey brought VASPs within the island’s AML/CFT ambit by making a VASP a different class of business that must be registered with the island’s regulator, the Jersey Financial Services Commission (JFSC), under Proceeds of Crime (Jersey). ) Act 1999. The deadline for registration with JFSC is 30 June 2023.
The JFSC has introduced grandfathering provisions for any business previously registered as a “virtual currency exchange” (ie a business that exchanges crypto for fiat or vice versa) so that VASP registration for an existing VCE will be on a “notification only” basis.
Jersey has also seen an influx of funds with Singaporean managers investing in digital assets, and heavy use is being made of the Jersey Private Fund regime (max 50 investors). Digital assets do not fall within the definition of a “designated investment” for the purposes of Singapore’s tax laws, so a Singapore-domiciled fund will be subject to tax in Singapore, and such tax leakage is hugely unattractive to investors. In contrast, funds structured as Jersey companies, which are tax resident in Jersey, are taxed at a rate of 0% on income from their investments. Coupled with the fact that there is no withholding tax or capital gains tax in Jersey, and that Jersey and Singapore have entered into a double taxation agreement which provides Jersey resident (and tax resident) digital asset funds with potential relief or exemption from exposure to tax on any gains of an income nature arising when disposing of cryptocurrencies in Singapore.
More broadly, Jersey continues to welcome credible digital asset companies; However, Jersey is not a “free-for-all” crypto, and the JFSC scrutinizes any business venture with digital assets to ensure that the business promoter, structure and operations are credible.
Conclusion
As the digital/virtual asset market matures, we expect the trend towards regulated business to continue, with each of our jurisdictions offering something different for a wide range of businesses. Please get in touch to discuss any of our jurisdictions in particular or to consider how they may differ.
